I should like to start by thanking Giles and Peter for having arranged today's conference, and for having offered me the opportunity to deliver this keynote address.

In 5 months time, in November, NATO Heads of State and Government will meet in Lisbon. At that Summit meeting, we will approve the Alliance's new Strategic Concept. This new Concept will lay out the Alliance's vision for the next decade. But it will also be pragmatic. It will acknowledge the political and economic realities we face.

At a time of budgetary constraint across the Alliance, defence budgets are already coming under increasing pressure. The budget crunch is an unpleasant reality - but it is also an opportunity. An opportunity to make NATO more efficient, and more effective.

An opportunity to make the Alliance even better suited to tackle the unpredictable security environment that confronts us. And an opportunity to bring NATO and the EU closer together.

In my remarks today, I want to focus on three points. First, how a stable, free and open market economy enhances our security. Second, why it is even more important to share the security burden in times of economic difficulty. And third, how we can spend smarter so that we get greater return from our defence dollars and euros.

My first point is the importance of keeping the fundamentals of a free and open market economy. In the early 19th century, the French economist and politician, Frédéric Bastiat, stated that "if goods don't cross borders, then armies will". And that assertion remains true today.

Trade encourages countries to acquire wealth through production and exchange, instead of through conquest. It encourages cooperation. And it discourages conflict, as countries do not want to jeopardise the stability and prosperity that free trade brings.

For most of our nations, the last 20 years have been a period of unprecedented economic growth. Globalisation has been a major factor in that economic growth. It has been typified by the free flow of information, of people, of goods, of ideas, of technology, and of services. Globalisation has greatly improved our prosperity and our general wellbeing. And it has led to a remarkable degree of economic interdependence between our nations.

It is no coincidence that during this same period of globalisation, the Stockholm International Peace Research Institute found that conflicts have reduced by nearly half -- from 33 to 17. And today, none of these remaining conflicts is a state-on-state conflict.

Quite simply, nations that trade together don't go to war against each other because the consequences are too severe. And we benefit from a virtuous cycle - with increased trade encouraging increased security which in turn leads to further trade and prosperity.

This virtuous cycle has been perfectly demonstrated here in Europe. After the end of World War Two, under the security umbrella provided by NATO, former enemies became friends. European nations were able to embark upon an ambitious economic and political integration project, which eventually became the European Union. And after the end of the Cold War, the European Union, together with NATO, were able to spread peace, progress and prosperity throughout our continent.

The ability for countries to trade, for companies to do their business, and for people to earn a living, is very much dependent on a stable and secure international environment. And it is especially dependent on free trade routes. Trade routes through the so called "global commons" - air, sea and land, and increasingly also through space and cyber space. We need to devote sufficient resources to maintaining these free routes if we want to maintain our economic prosperity.

But we need more. We must not only keep these routes open. We must also secure their full potential. And ensure that free trade flourishes.

Therefore we must avoid protectionism. At times of financial crisis and economic recession, it is often tempting to adopt "buy local" policies, or put up trade barriers to protect national businesses or jobs. This is a temptation we must resist, because experience shows that such moves are counter-productive.

From an economic point of view, protectionist measures offer only a false sense of security to businesses and jobs that are no longer viable. But the consequences of protectionist measures are often felt most severely in those countries and regions that are already fragile.

And there they will only amplify some of the most serious security threats that we have already had to deal with in recent years - such as energy security, water security, food security, piracy, violent extremism and terrorism.

There is a lesson to be learned. If we move away from free market principles in response to the current economic crisis, then we are likely to find ourselves confronted by more fragile economies, vulnerable states and regional instability. If, on the other hand, we maintain a free and open market, we will not only create strong economies and improve economic wellbeing, but also improve security and stability.

But economic prosperity is not just a question of wise economic choices. Economic prosperity also requires wise security choices.

How, for example, can we protect our populations and critical infrastructure from terrorism? Or our territories from missile strikes? Or our societies and financial systems from cyber attacks? Or our shipping from pirates? How can we protect not only economic activity but also human life, if we don't have the right capabilities?

And this leads me to the second point I wish to make this morning, how to share the security burden within our Alliance.

By sharing the burden within NATO, individual Allies can achieve a far greater level of security than they could achieve through any national approach -- and at far lower cost. But this collective insurance policy requires the regular premiums to be paid. NATO membership does not come for free. There are responsibilities and obligations that each Ally needs to meet - including financial obligations.

All Allies, on both sides of the Atlantic, need to demonstrate the political will to continue to invest in defence - and to invest their fair share in NATO.

At the moment, all Allies are having to cope with the serious effects of the economic crisis. However, we need to be aware of the potential long-term negative effects if we implement defence cuts that are too large and disproportionate.

In more than half of our NATO member nations, real defence expenditure is already lower now than in 2008. Moreover, the decrease in defence spending in those nations is greater in percentage terms than the decrease in their national GDP.

Ladies and Gentlemen,

European Allies, in particular, must resist the temptation to use the economic crisis as an excuse for letting the transatlantic defence spending gap widen any further.

Already today the United States spends three times more on defence per soldier than Europe: more than three hundred thousand Euros as opposed to only one hundred thousand per soldier in Europe. And the US spends five times more on equipment and Research and Development per soldier than Europe; one hundred and twelve thousand Euros as opposed to only twenty-three thousand Euros. These figures indicate a huge technology and capability gap across the Atlantic.

Within Europe, there is also an alarming gap in Research and Development spending between nations. There is a five-to-one ratio between the highest and lowest European investors in R&D.

We must work hard to close these gaps. Because if we don't, our ability to operate together will be affected. And that could well have serious consequences for our political cohesion.

We must be careful not to allow the capability gap to grow into a credibility gap. That means we must resist unilateral actions. It means that we must ensure cohesion across the Alliance in our defence decisions. And it means that we must resist the temptation to cut back on long-term investments in high-technology capabilities.

We should not continue to invest our scarce resources in fixed infrastructure and soldiers who are essentially stuck in their barracks. We should re-direct our investments towards more flexible, mobile and modern armed forces - armed forces that we can actually use.

We must focus on cutting fat, and building up muscle.

Of course, some of these decisions will not be easy. And they will require political courage.

But that, too, is part and parcel of burden sharing. It will allow us to deliver a more modern, more efficient, and more effective Alliance. And if we were able to do this, then we would turn the budgetary constraints into something really positive.

My third and final point is that NATO Allies must get a greater return from their defence dollars and euros. So let me share with you some specific ideas on how I think we can spend smarter, and with greater effect.

Clearly, every nation should continue to provide an appropriate and fair share of combat forces. But we cannot expect all nations to cover the full spectrum of capabilities, such as strategic airlift, combat helicopters or fighter aircraft - not least because these capabilities are becoming increasingly expensive.

Through a combination of collective approaches and multinational solutions, we can deliver more and better. For example, more common funding could help smaller nations to share expensive capabilities they would otherwise be unable to afford. Common funding could also help to deliver an even greater focus on training, communication and interoperability.

Similarly, through role specialisation and prioritisation, we can encourage nations to focus their investment in specific areas, rather than spread their resources thinly across an entire range of capabilities.

At the same time, reorganisation and rationalisation can help us to bring down the expensive fixed overheads associated with infrastructure and personnel. The NATO command structure is one area where there is considerable potential for streamlining. NATO's agency structure is another - and in our own Headquarters, here in Brussels, I have already started to reallocate limited resources from support areas to more operational priorities.

All these measures can help us to bring down costs - and to spend our defence dollars and euros smarter. But I believe there is yet another way of delivering more with less - by building a true strategic partnership between NATO and the European Union.

NATO and the European Union are two of the world's most important institutions. They share 21 members. They have complementary skills. And no other strategic partnership would offer so many benefits - both operationally and financially.

Operationally, thus far, close cooperation on the ground has been developed mainly through ad hoc arrangements. But there is an urgent need for more coordination at the institutional level and between staffs. I believe we should seriously consider cross participation at our respective operational meetings - and not just limit ourselves to those under the so-called Berlin-plus arrangements.

In Kosovo, KFOR and EULEX work together well, but we need to match this cooperation here in Brussels so we can develop, and align, our long-term policies with regard to the Western Balkans.

Similarly, the good cooperation at the tactical level between our assets deployed on counter-piracy operations off the Horn of Africa needs to be matched by joint NATO-EU political consultations on how to address the causes of piracy, rather than just the symptoms.

But it is in Afghanistan, that improved institutional cooperation would bring the most significant operational benefits. We, both NATO and the EU, need to understand that our respective roles in Afghanistan are not just complementary - they are actually mutually reinforcing. We are both there under the same UN mandate.

And the success of each of our missions depends, to a very large extent, on the success of the other. Greater institutional cooperation - the true strategic partnership that I would like to see -- would help to deliver the "unity of effort" that is required for success in Afghanistan.

Financially, too, a NATO-EU strategic partnership would be a major cost-saver, especially in the area of military capabilities. We have already seen with the Strategic Airlift Capability Initiative that cooperation between NATO and the European Union is possible. Ten NATO nations, nine of which are also EU nations, as well as two EU non-NATO partner nations, have combined their efforts and operate three C-17 large body transport aircraft.

Both NATO and the European Union now have a capability they would otherwise not have had - and significant savings are achieved. Through this collective approach, participating nations have saved on operating costs, on command and control, on logistics and on maintenance costs. This is a perfect example of spending smarter.

Similarly, through our combined efforts to improve the availability of mission-capable helicopters we have improved our operational capability, avoided duplication, and shared costs. With NATO focussing on the upgrade of the helicopters, and the European Union focussing on the pilot training, we are able to maximise the return on our scarce resources.

But these two examples are rare - and I believe, we can, and we should do more. In many cases, NATO and the European Union share the same capability requirements - so let us identify the priority areas and agree that wherever possible, any capability work in one organisation shall be open to all members of the other organisation too.

We have made some progress. We have created a NATO-EU Capability Group - but this is essentially a forum for information exchange. We now need to move it to the next stage - where this Group becomes a forum for active cooperation. And where mutual cooperation is no longer the exception, but the norm.

Finally, let me make one further suggestion that I believe would help us to reach that stage. At our Lisbon Summit in November, NATO is likely to launch a new capabilities initiative to address critical shortfalls. The European Union shares many of these shortfalls - so what better way to proceed than by inviting EU nations to join this initiative.

Ladies and Gentlemen,

It is well known that the Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger -- but recognise the opportunity.

I can think of no better way to describe the significance of the current economic crisis. We need to be aware of the dangers of making the wrong decisions in our defence spending. But we must also realise that we have a rare opportunity to make NATO truly fit for the 21st century.

By focussing on open market economic principles, by sharing the defence burden more equitably, and by spending smarter, we can deliver real security and an even more effective Alliance at lower cost. That is good news for Allied governments -- and it's even better news for our taxpayers.